AMR Annual Report 2001

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Information about AMR Annual Report 2001
Finance

Published on February 25, 2009

Author: finance11

Source: slideshare.net

The “can do” spirit is evident not just in our name, but in every one of our employees. We’ve never been more proud to bear the name American. – Donald J.Carty AMR CORPORATION 2001 ANNUAL REPORT AMR CORPORATION P.O. Box 619616, Dallas/Fort Worth, Texas 75261-9616 The American Airlines internet address is www.aa.com The AMR internet address is www.amrcorp.com

TABLE CONTENTS OF Letter to Shareholders, Customers and Employees 1 Financial Table of Contents 5 Operating Aircraft Fleets 41 Board of Directors 42 Corporate Information 44 ABOUT OUR ANNUAL REPORT Many would say it’s no coincidence that the word American ends in “I can.” For the cover of this year’s annual report, we felt it particularly appropriate to highlight those four letters that are also found in the name of our airline. We think they speak strongly to the indomitable spirit that has made our country great and to the spirit that helped pull our airline through an incredibly chal- lenging year. If you’d prefer to view the annual report online, you’ll find it at: http://www.amrcorp.com/ar2001/index.htm.

LETTER SHAREHOLDERS, CUSTOMERS down for several days. And though we were able to handle a TO EMPLOYEES slew of new security-related operational demands and get our AND airline up and running again, passenger traffic for the entire In recent years, I have had the pleasure, and the honor – industry was dramatically lower. In the days and weeks follow- in my role as Chairman and CEO of AMR – to highlight ing the attacks, we acted quickly by reducing our capacity to in these pages the achievements of our Company during the get supply and demand better aligned. preceding year. In some respects, 2001 was like most other When we fly less, we need fewer aircraft, so we also years – the American Airlines and American Eagle teams rose hastened the retirement of many older aircraft, while elimi- to meet incredible challenges, and from a strategic standpoint, nating others through lease returns. All told, we removed we did quite a bit to position our airline for long-term com- about 70 aircraft from our fleet. And as we ratcheted down petitive success. capacity, we also focused very hard on reducing both capital But as everyone knows, 2001 was not just another year. spending and operating expenses. Earlier in the year, in It was a year that brought enormous pain and unprecedented response to the weakening revenue environment, we removed challenges to our country, to our industry and certainly to close to $1 billion from our 2001-2002 capital plan. In the AMR Corporation. For American Airlines, every accomplish- post-9/11 environment, we took that initiative quite a bit ment, indeed every other event, was overshadowed by the further by drastically reducing capital spending for aircraft twin calamities of the September 11 attacks and the loss of and non-aircraft items. Flight 587 in Queens, New York, on November 12. In terms of our fleet, we deferred 35 of the 45 firm 2002 Prior to September 11, our Company’s greatest obstacle had deliveries until sometime beyond 2003. We also made been the slowing U.S. economy, which triggered a substantial significant cutbacks in our non-essential aircraft modifica- decline in air travel generally, and business travel in particular. tions, scaled back facilities projects in a number of cities, cut The previously stable relationship between industry supply our information technology development budget and drasti- and demand deteriorated badly, and as revenues fell, many of cally cut spending on ground equipment and training our costs continued to rise. As a consequence, AMR posted simulators. All told, we were able to remove another $2.5 significant losses in the first half of the year. billion from our capital plan – on top of the $1 billion The September 11 attacks turned a difficult year into a we cut earlier. As a result, our capital spending for 2001 catastrophe. The nation’s aviation system was completely shut 1

was approximately $3.6 billion, and we expect it to be just $1.9 billion in secured financing. And, during 2001, we $1.8 billion in 2002. received $730 million from the government as part of the Our capital controls have been complemented by our Airline Stabilization Act passed in September. We expect to myriad expense-reduction efforts, which include: trimming receive another $130 million in 2002. in-flight amenities, closing most of our city ticket offices and All that leaves us with a balance sheet which, relative to some lesser-used airport lounges and cutting back on advertis- the rest of the industry, remains strong. We ended 2001 with ing and promotions, information technology and corporate about $3 billion in cash and a large stockpile of unencum- overhead. We have also been able to negotiate some meaning- bered aircraft assets we can draw upon, if necessary. Nonethe- ful cost reductions with many of our suppliers. less, the losses we incurred for the year were staggering. The None of these initiatives were particularly pleasant, net loss of about $1.8 billion in 2001, which includes a loss but worst of all, in the face of staggering losses we took the of $800 million for the fourth quarter alone, dwarfed any painful step of reducing our workforce by the equivalent of previous year’s loss. 20,000 jobs. Fortunately, through creative and collaborative 2001 was a painful year for all three of our major con- work on the part of our management team and union leaders, stituency groups. We lost many valued customers, friends and we were able to mitigate at least some of the effect on our colleagues on both September 11 and November 12. For people through initiatives like voluntary leaves, job sharing, many others, the joy of flight has been dampened, at least military leaves and reductions in overtime. temporarily. Thousands of AMR employees lost their jobs, Controlling both capital spending and operating costs was, and all of us were deeply troubled by the attacks on our coun- and is, a critically important part of our efforts to rebuild our try. Customers and employees alike have had to make some Company. Moreover, our determination to prudently manage dramatic adjustments to deal with the new security require- our balance sheet in recent years paid off in a big way as we ments of the post-9/11 world. And of course, our shareholders sought a cash cushion to help weather the storm of late 2001. have taken a tremendous hit, as AMR shares fell significantly For some time, AMR had a sizeable undrawn bank line, in the aftermath of the September attacks. which we drew down shortly after September 11. In the days And yet, despite all the bad news, 2001 – which, among following, we were also able to complete a deal that provided other things, marked our Company’s 75th anniversary – did contain a number of important highlights and milestones. 2

In April, we acquired substantially all of the assets of Trans our recent financial performance has caused us to shelve, at World Airlines (TWA), and in the months that followed, our least temporarily, some technology-related initiatives, we are people – despite all the aforementioned problems in our busi- nonetheless committed to leading the industry when it comes ness – completed the biggest, the most complex, and the most to the development and application of technology on behalf successful integration of two airlines in the history of our of our customers, shareholders and employees. industry. The TWA acquisition was a huge step forward for As we begin 2002, we face a business environment and an our domestic network, and it made American Airlines, once industry landscape that has been dramatically altered during again, the largest airline in the world. the past year. But as we learned in 2001, the values and prin- The More Room Throughout Coach campaign, which ciples that have guided our Company through the past three we launched in 2000, gained real traction in 2001, giving quarters of a century are as solid as ever – and the change us an important point of differentiation versus the rest of swirling around us makes sticking to those principles all the the industry. In February 2002, American completed the more important. implementation of More Room, which included the flawless One principle that served us well in 2001 was the flexi- reconfiguration of more than 850 aircraft and the removal of bility we built into our plans during the prosperous years of about 9,000 seats from AA and TWA jets. the mid-to-late-1990s. By not over-leveraging our balance Despite the massive changes of late 2001, our people never sheet, and by consciously keeping our fleet plans as flexible took their eyes off the ball when it came to providing high- as possible, we were better positioned to respond to the cata- quality customer service. In fact, as the year drew to a close, strophic events of late 2001. American’s on-time performance steadily improved. I’m Despite all that’s happened, the six tenets of our Airline pleased to report that this momentum carried over into the Leadership Plan – Safety, Service, Product, Network, Technol- first months of 2002 as American climbed to within an ogy and Culture – remain our blueprint for industry leader- eyelash of the top spot in on-time performance in January. ship. While individual strategies within those broad categories At the airports, in our reservations centers and indeed must evolve, we are as convinced as ever that the only way to throughout our Company, our people are creatively applying create the best possible outcomes for all of our constituencies new technologies to streamline processes, generate revenue, is by leading the airline industry in all six. That’s the goal we reduce costs and improve the customer experience. And while 3

are determined to achieve. Underlying that goal is the need to the Transportation Security Administration to achieve that establish and sustain strong relationships. Indeed, we could goal. Nothing we do is more important than ensuring the not have emerged from 2001 intact were it not for the sup- safety of air travel for our customers and our employees. port of the government, the communities we serve, our sup- Finally, our discussion of 2001 would not be complete pliers, our airline partners, the financial community and, most without acknowledging the leadership and contributions of of all, the people of American Airlines and American Eagle. Charles Pistor who joined the AMR and American Airlines At the same time, it is distressing to note that not all of Boards of Directors in 1982 and retired in 2001. our relationships within the Company have lived up to our As we begin 2002 there are some hopeful signs on the standards. While we have made company-wide progress in the horizon. In fact, as of this writing we have – in response to a area of diversity, we have seen pockets of resistance similar to steady increase in passenger and cargo traffic – begun slowly those that other companies have experienced. Even isolated adding back some of the capacity we withdrew in the fall of reports of harassment within our various workgroups are 2001. In the months to come, we will take full advantage of cause for concern. the addition of TWA to our network. That, along with our To eliminate this behavior and capitalize on the benefits much-improved dependability and the fully implemented of a diverse workforce, I have directed managers throughout More Room product, ought to give us a leg up in the even- the Company to clearly articulate our zero-tolerance policies tougher-than-usual competition for each airline customer. as they relate to discrimination and harassment. In fact, we With a strong balance sheet, a premium brand image, a have rewritten and strengthened those policies to make it clear powerful network and steadily improving operational per- that we will terminate people for unacceptable behavior. We formance, I believe AMR is ready to meet whatever challenges have also asked four members of our Board of Directors – await us in 2002. But more important than any of those fac- Earl Graves, Judith Rodin, Armando Codino and Roger tors are the men and women of our Company. As employees, Staubach – to monitor our progress and help us maintain our as human beings, our people were put through more in 2001 position of cultural leadership within the industry. than any of us could possibly have imagined a year ago. And We are equally resolved to making travel yet the dignity, the strength and the grace they exhibited as we on American Airlines as safe and secure started rebuilding the airline are something I’ll never forget. as it can possibly be, while at the same As a colleague, I am humbled by it. I know I speak for all of time doing all we can with tools such as us on the senior management team when I say we will be airport automation and premium doing our best – in 2002 and beyond – to live up to the queues at security checkpoints to example they have set for us. help our customers get through the airport more quickly. We Sincerely, firmly believe that air travel can be both safe and convenient, and we are working actively with Donald J. Carty the Air Transport Association and Chairman, President and CEO 4

FINANCIAL TABLE OF CONTENTS Management’s Discussion and Analysis 6 Consolidated Statements of Operations 14 Consolidated Statements of Cash Flows 15 Consolidated Balance Sheets 16 Consolidated Statements of Stockholders’ Equity 18 Notes to Consolidated Financial Statements 19 Report of Independent Auditors 39 Report of Management 40 Operating Aircraft Fleets 41 Board of Directors 42 Management – Divisions and Subsidiaries 43 Corporate Information 44 5

MANAGEMENT’S DISCUSSION AND ANALYSIS AMR Corporation (AMR or the Company) was incorporated in October 1982. AMR’s principal subsidiary, American Airlines, Inc., was founded in 1934. On April 9, 2001, American Airlines, Inc. purchased substantially all of the assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA). Accordingly, the operating results of TWA since the date of acquisition have been included in the accompanying consolidated financial statements for the year ended December 31, 2001 (see Note 3 to the consolidated financial statements). American Airlines, Inc., including TWA (collectively, American), is the largest scheduled passenger airline in the world. AMR’s operations fall almost entirely in the airline industry. RESULTS OF OPERATIONS AMR’s net loss in 2001 was $1.8 billion, or $11.43 loss per share. AMR’s net earnings in 2000 were $813 million, or $5.43 per share ($5.03 diluted). On September 11, 2001, two American Airlines aircraft were hijacked and destroyed in terrorist attacks on The World Trade Center in New York City and the Pentagon in northern Virginia. On the same day, two United Air Lines aircraft were also hijacked and used in terrorist attacks. In response to the terrorist attacks, the Federal Aviation Adminis- tration (FAA) issued a federal ground stop order on September 11, 2001, prohibiting all flights to, from and within the United States. Airports did not reopen until September 13, 2001 (except for Washington Reagan Airport, which was partially reopened on October 4, 2001). The Company was able to operate only a portion of its scheduled flights for several days thereafter. When flights were permitted to resume, passenger traffic and yields on the Company’s flights were significantly lower than prior to the attacks. As a result, the Company reduced its operating schedule to approximately 80 percent of the schedule it flew prior to September 11, 2001. Somewhat offsetting the impact of the September 11 events, the Company recorded $856 million in reimbursement from the U.S. Government under the Air Transportation Safety and System Stabilization Act (the Act) (see Note 2 to the consolidated financial statements). REVENUES 2001 Compared to 2000 The Company’s 2001 revenues, yield, revenue passenger miles (RPMs) and available seat miles (ASMs) were severely impacted by the September 11, 2001 terrorist attacks, the Company’s reduced operating schedule, a worsening of the U.S. economy that had already been dampening the demand for travel both domestically and internationally prior to the September 11, 2001 events, business travel declines as a result of the September 11, 2001 attacks, and increased fare sale activity occurring subsequent to the September 11 attacks to encourage passengers to resume flying. The Company’s revenues decreased approximately $740 million, or 3.8 percent, versus 2000. However, excluding TWA’s revenues for the period April 10, 2001 through December 31, 2001, the Company’s revenues would have decreased approximately $2.6 billion versus 2000. For comparability purposes, the following discussion does not combine American’s and TWA’s results of operations or related statistics for 2001. American’s passenger revenues decreased by 14 percent, or $2.3 billion. In 2001, American derived approximately 68 percent of its passenger revenues from domestic operations and approximately 32 percent from international operations. American’s domestic revenue per available seat mile (RASM) decreased 11.3 percent, to 9.28 cents, on a capacity decrease of 5 percent, or 104 billion ASMs. International RASM decreased to 9.07 cents, or 5.2 percent, on a capacity decrease of 4.9 percent. The decrease in international RASM was led by an 11.8 percent and 10.8 percent decrease in Pacific and European RASM, respectively, slightly offset by a 0.9 percent increase in Latin American RASM. The decrease in international capacity was driven by a 6.5 percent and 4.7 percent reduction in Latin American and European ASMs, respectively, partially offset by an increase in Pacific capacity of 2.8 percent. TWA’s passenger revenues were approximately $1.7 billion for the period April 10, 2001 through December 31, 2001. TWA’s RASM was 7.74 cents on capacity of 21.7 billion ASMs. AMR Eagle’s passenger revenues decreased $74 million, or 5.1 percent. AMR Eagle’s traffic remained flat compared to 2000, at 3.7 billion RPMs, while capacity increased to 6.5 billion ASMs, or 3.4 percent. Similar to American, the decrease in AMR Eagle’s revenues was due primarily to the September 11, 2001 terrorist attacks and a worsening of the U.S. economy that had already been dampening the demand for air travel prior to that date. Cargo revenues decreased 8.2 percent, or $59 million, for the same reasons as noted above. 2000 Compared to 1999 The Company’s revenues increased approximately $2.0 billion, or 11.1 percent, versus 1999. American’s passenger revenues increased by 11.3 percent, or $1.7 billion. The increase in revenues was due primarily to a strong U.S. economy, which led to strong demand for air travel both domestically and internationally, a favorable pricing climate, the impact of a domestic fuel surcharge implemented in January 2000 and increased in September 2000, a labor disruption at one of the Company’s competitors which positively impacted the Company’s revenues by approximately $80 to $100 million, and a schedule disruption which negatively impacted the Company’s operations in 1999. In 2000, American derived approximately 70 percent of its passenger revenues from domestic operations and approximately 30 percent from international operations. 6

American’s domestic RASM increased 12.4 percent, to 10.42 cents, on a capacity decrease of 1.6 percent, or 109.5 billion ASMs. The decrease in domestic capacity was due primarily to the Company’s More Room Throughout Coach program. Inter- national RASM increased to 9.64 cents, or 10.7 percent, on a capacity increase of 3.2 percent. The increase in international RASM was led by a 16.5 percent, 13.4 percent and 7.8 percent increase in Pacific, European and Latin American RASM, respectively. The increase in international capacity was driven by a 6.6 percent, 2.7 percent and 0.5 percent increase in European, Pacific and Latin American ASMs, respectively. AMR Eagle’s passenger revenues increased $158 million, or 12.2 percent. AMR Eagle’s traffic increased to 3.7 billion RPMs, up 10.7 percent, while capacity increased to 6.3 billion ASMs, or 10.9 percent. The increase in revenues was due primarily to growth in AMR Eagle capacity aided by a strong U.S. economy, which led to strong demand for air travel, and a favorable pricing environment. Cargo revenues increased 12.1 percent, or $78 million, due primarily to a fuel surcharge implemented in February 2000 and increased in October 2000, and the increase in cargo capacity from the addition of 16 Boeing 777-200ER aircraft in 2000. OPERATING EXPENSES 2001 Compared to 2000 The Company’s operating expenses increased 17 percent, or approximately $3.1 billion. However, excluding TWA’s expenses for the period April 10, 2001 through December 31, 2001, the Company’s expenses would have increased approximately $888 million versus 2000. In addition to the specific explanations provided below, the significant decline in passenger traffic resulting from the terrorist acts of September 11, 2001 and resulting reduced operating schedule caused a favorable impact on certain passenger-related operating expenses, including aircraft fuel, other rentals and landing fees, commissions to agents and food service. American’s cost per ASM increased 6.3 percent to 11.14 cents, excluding TWA and the impact of special charges – net of U.S. Government grant. The increase in American’s cost per ASM was driven partially by a reduction in ASMs due to the Company’s More Room Throughout Coach program. Removing the impact of this program, American’s cost per ASM grew approximately 3.3 percent, excluding TWA and the impact of special charges – net of U.S. Government grant. TWA’s cost per ASM, excluding the impact of special charges – net of U.S. Government grant, was 10.58 cents. Wages, salaries and benefits increased 18.4 percent, or $1.3 billion, and included approximately $920 million related to the addition of TWA. The remaining increase of approximately $329 million related primarily to an increase in the average number of equivalent employees and contractual wage rate and seniority increases that are built into the Company’s labor contracts. During 2001, the Company recorded approximately $300 million in additional wages, salaries and benefits related primarily to the Company’s new contracts with its flight attendants and Transport Workers Union work groups. This was mostly offset by a $328 million decrease in the provision for profit-sharing as compared to 2000. Aircraft fuel expense increased 15.8 percent, or $393 million, and included approximately $322 million related to the addition of TWA. The remaining increase in aircraft fuel expense was due to a 4.2 percent increase in the Company’s average price per gallon, partially offset by a 3.7 percent decrease in the Company’s fuel consumption, excluding TWA. Depreciation and amortization expense increased 16.8 percent, or $202 million, due primarily to the addition of new aircraft and an increase of approximately $88 million related to TWA. Other rentals and landing fees increased $198 million, or 19.8 percent, and included approximately $130 million related to the addition of TWA. The remaining increase of $68 million was due primarily to higher facilities rent and landing fees across the Company’s system. Commissions to agents decreased 19.5 percent, or $202 million, and included approximately $59 million related to TWA. The decrease in commissions to agents was due primarily to a 13.2 percent decrease in passenger revenues, excluding TWA, and the benefit from commission structure changes implemented in 2000. Aircraft rentals increased $222 million, or 36.6 percent, due primarily to the addition of TWA aircraft. Other operating expenses increased 11.1 percent, or $368 million, and included approximately $358 million related to TWA. Special charges – net of U.S. Govern- ment grant included: (i) a $685 million asset impairment charge recorded in the second quarter of 2001 related to the write-down of the carrying value of the Company’s Fokker 100, Saab 340 and ATR-42 aircraft and related rotables, (ii) charges resulting from the September 11, 2001 terrorist events, including approximately $552 million related to aircraft charges, $115 million in facility exit costs, $71 million in employee charges and $43 million in other charges, and (iii) an $856 million benefit recognized for the reimbursement from the U.S. Government under the Act. See a further discussion of special charges – net of U.S. Government grant in Note 2 to the consolidated financial statements. 2000 Compared to 1999 The Company’s operating expenses increased 10.5 percent, or approximately $1.7 billion. American’s cost per ASM increased by 10.3 percent to 10.48 cents, partially driven by a reduction in ASMs due to the Company’s More Room Throughout Coach program. Removing the impact of this program, American’s cost per ASM grew approximately 6.9 percent. Wages, salaries and benefits increased $663 million, or 10.8 percent, primarily due to an increase in the average number of equivalent employees and contractual wage rate and seniority increases that are built into the Company’s labor contracts, an increase of approximately $93 million in the provision for profit-sharing, and a charge of approximately $56 million for the Company’s employee home computer program. Aircraft fuel expense increased $799 million, or 47.1 percent, due to an increase of 42.0 percent in the Company’s average price per gallon and a 3.7 percent increase in the Company’s fuel consumption. The increase in fuel expense is net of gains of approximately $545 million recognized during 2000 related to the Company’s fuel hedging program. Depreciation and amortization expense increased $110 million, or 10.1 percent, due primarily to the addition 7

of new aircraft, many of which replaced older aircraft. Maintenance, materials and repairs expense increased $92 million, or 9.2 percent, due primarily to an increase in airframe and engine maintenance volumes at the Company’s maintenance bases and an approximate $17 million one-time credit the Company received in 1999. Commissions to agents decreased 10.8 percent, or $125 million, despite an 11.4 percent increase in passenger revenues, due primarily to commission structure changes implemented in October 1999 and January 2000, and a decrease in the percentage of commissionable transactions. OTHER INCOME (EXPENSE) Other income (expense) consists of interest income and expense, interest capitalized and miscellaneous – net. 2001 Compared to 2000 Interest income decreased $44 million, or 28.6 percent, resulting from lower investment balances throughout most of 2001. Interest expense increased $71 million, or 15.2 percent, resulting primarily from the increase in long- term debt of approximately $4.2 billion. Miscellaneous – net decreased $70 million due primarily to 2001 including a $45 million gain from the settlement of a legal matter related to the Company’s 1999 labor disruption, offset by the write-down of certain investments held by the Company. This compares to 2000 including a $57 million gain on the sale of the Company’s warrants to purchase 5.5 million shares of priceline.com Incorporated (priceline) common stock and a gain of approximately $41 million from the recovery of start-up expenses from the Canadian Airlines International Limited (Canadian) services agreement. 2000 Compared to 1999 Interest income increased $59 million, or 62.1 percent, due primarily to higher investment balances. Interest expense increased $74 million, or 18.8 percent, resulting primarily from financing new aircraft deliveries. Interest capitalized increased 28 percent, or $33 million, due to an increase in purchase deposits for flight equipment. Miscellaneous – net increased $38 million due primarily to a $57 million gain on the sale of the Company’s warrants to purchase 5.5 million shares of priceline common stock and a gain of approximately $41 million from the recovery of start-up expenses from the Canadian services agreement. During 1999, the Company recorded a gain of approximately $75 million from the sale of a portion of American’s interest in Equant N.V. and a gain of approximately $40 million related to the sale of the Company’s investment in the preferred stock of Canadian. These gains were partially offset by the provision for the settlement of litigation items and the write-down of certain investments held by the Company during 1999. OPERATING STATISTICS The following table provides statistical information for American (excluding TWA) and AMR Eagle for the years ended December 31, 2001, 2000 and 1999. Year Ended December 31, 2001 2000 1999 American Airlines Revenue passenger miles (millions) 106,224 116,594 112,067 Available seat miles (millions) 153,035 161,030 161,211 Cargo ton miles (millions) 2,058 2,280 2,068 Passenger load factor 69.4% 72.4% 69.5% Breakeven load factor * 78.1% 65.9% 63.8% Passenger revenue yield per passenger mile (cents) 13.28 14.06 13.14 Passenger revenue per available seat mile (cents) 9.22 10.18 9.13 Cargo revenue yield per ton mile (cents) 30.24 31.31 30.70 Operating expenses per available seat mile (cents) * 11.14 10.48 9.50 Operating aircraft at year end 712 717 697 AMR Eagle Revenue passenger miles (millions) 3,725 3,731 3,371 Available seat miles (millions) 6,471 6,256 5,640 Passenger load factor 57.6% 59.6% 59.8% Operating aircraft at year end 276 261 268 * Excludes the impact of special charges – net of U.S. Government grant 8

LIQUIDITY AND CAPITAL R ESOURCES The impact of the terrorist attacks of September 11, 2001 and their aftermath on the Company and the sufficiency of its financial resources to absorb that impact will depend on a number of factors, including: (i) the magnitude and duration of the adverse impact of the terrorist attacks on the economy in general, and the airline industry in particular; (ii) the Company’s ability to reduce its operating costs and conserve its financial resources, taking into account the increased costs it will incur as a conse- quence of the attacks, including those referred to below; (iii) the higher costs associated with new airline security directives, including the impact of the Aviation and Transportation Security Act, and any other increased regulation of air carriers; (iv) the significantly higher costs of aircraft insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance will continue to be available; (v) the Company’s ability to raise additional financing and the cost of such financing; (vi) the price and availability of jet fuel, and the availability to the Company of fuel hedges in light of current industry conditions; and (vii) the extent of the benefits received by the Company under the Act, taking into account any challenges to and interpretations or amendments of the Act or regulations issued pursuant thereto. In response to the September 11, 2001 terrorist attacks, the Company initiated the following measures: reduced capacity by approximately 20 percent, grounded aircraft and deferred certain aircraft deliveries to future years, significantly reduced capital spending, closed facilities, reduced its workforce (see Note 2 to the consolidated financial statements for additional information) and implemented numerous other cost reduction initiatives. Operating activities provided net cash of $511 million in 2001, $3.1 billion in 2000 and $2.3 billion in 1999. The $2.6 billion decrease from 2000 to 2001 resulted primarily from a decrease in income. On April 9, 2001, American purchased substantially all of the assets and assumed certain liabilities of TWA for approximately $742 million, which was funded from the Company’s existing cash and short-term investments. Capital expenditures in 2001 totaled $3.6 billion, compared to $3.7 billion in 2000 and $3.5 billion in 1999. In 2001, American took delivery of 26 Boeing 737-800s, 13 Boeing 777-200ERs and 16 Boeing 757-200s. AMR Eagle took delivery of 15 Embraer 140s, seven Embraer 135s, six Embraer 145s and one Bombardier CRJ-700 aircraft. These expenditures were financed primarily through secured mortgage and debt agreements. Ten Boeing 737-800 aircraft were financed through sale- leaseback transactions, resulting in cash of approximately $352 million being received by the Company. Proceeds from the sale of equipment and property and other investments of $401 million included the proceeds received upon the delivery of five McDonnell Douglas MD-11 aircraft to FedEx. During the fourth quarter of 2001, the Company reached an agreement with Boeing that included a combination of aircraft delivery deferrals, substitutions and limited additional aircraft orders. As a direct result of the agreement with Boeing, the Company’s 2002 and 2003 aircraft commitment amounts have been reduced, in the aggregate, by approximately $700 million. Following this agreement, at December 31, 2001, the Company had commitments to acquire the following aircraft: 47 Boeing 737-800s, 14 Boeing 777-200ERs, nine Boeing 767-300ERs, seven Boeing 757-200s, 124 Embraer regional jets and 24 Bombardier CRJ-700s. Deliveries of all aircraft extend through 2008. Future payments for all aircraft, including the estimated amounts for price escalation, will approximate $1.3 billion in 2002, $1.7 billion in 2003, $1.2 billion in 2004 and an aggregate of approximately $1.9 billion in 2005 through 2008. These future payments are net of approximately $470 million related to deposits made for 2002 aircraft deliveries – which have been deferred as part of the agreement with Boeing – that will be applied to future aircraft deliveries. In addition to these commitments for aircraft, the Company expects to spend approximately $500 million in 2002 for modifications to aircraft, renovations of – and additions to – airport and off-airport facilities, and the acquisition of various other equipment and assets. During 2001, American issued approximately $2.6 billion of enhanced equipment trust certificates which has been recorded as long-term debt. These enhanced equipment trust certificates are secured by aircraft, bear interest at 6.8 percent to 9.1 percent, and mature in 2006 to 2019. Also during 2001, as mentioned above, the Company entered into approximately $1.1 billion of various debt agreements secured by aircraft. Effective rates on these agreements are fixed or variable (based upon the London Interbank Offered Rate [LIBOR] plus a spread), ranging up to approximately 4.5 percent, and mature over various periods of time, ranging from 2007 to 2021. American has an $834 million credit facility that expires December 15, 2005. At American’s option, interest on this facility can be calculated on one of several different bases. For most borrowings, American would anticipate choosing a floating rate based upon LIBOR. During the fourth quarter of 2001, American amended this credit facility to include, among other items, a revision of its financial covenants, including modifications to its fixed charge covenant and the addition of certain liquidity requirements. The next test of the fixed charge covenant will occur on June 30, 2003 and will consider only the preceding six-month period. American secured the facility with previously unencumbered aircraft. In addition, the facility requires that American maintain at least $1.5 billion of liquidity, as defined in the facility, which consists primarily of cash and short-term investments, and 50 percent of the net book value of its unencumbered aircraft. As of December 31, 2001, $814 million was outstanding under this credit facility, at an interest rate of 5.09 percent. The interest rate on the entire credit facility will be reset on March 18, 2002. 9

In addition, American has available a $1 billion credit facility that expires September 30, 2002. Interest on this facility is based upon LIBOR plus a spread. This facility is immediately available subject to the Company providing specified aircraft collateral as security at the time of borrowing. At December 31, 2001, no borrowings were outstanding under this facility. Following the September 11, 2001 events, Standard & Poor’s and Moody’s downgraded the credit ratings of AMR and American, and the credit ratings of a number of other major airlines. The long-term corporate credit ratings of AMR and American were initially retained on review for possible downgrade by Moody’s, and following subsequent downgrades, were given a negative outlook. In addition, the long-term corporate credit ratings of AMR and American remain on Standard & Poor’s CreditWatch with negative implications. Any additional reductions in AMR’s or American’s credit ratings could result in increased borrowing costs to the Company and might limit the availability of future financing sources. The following table summarizes the Company’s obligations and commitments to be paid in 2002 and 2003 (in millions): Nature of commitment 2002 2003 Operating lease payments for aircraft and facility obligations * $ 1,336 $ 1,276 Firm aircraft commitments 1,300 1,700 Long-term debt ** 556 296 Capital lease obligations ** 326 243 Total obligations and commitments $ 3,518 $ 3,515 * Certain special facility revenue bonds issued by municipalities – which are supported by operating leases executed by American – are guaranteed by AMR and American. See Note 6 to the consolidated financial statements for additional information. ** Excludes related interest amounts In addition to the Company’s approximately $3.0 billion in cash and short-term investments as of December 31, 2001, the Company has available a variety of future financing sources, including, but not limited to: (i) the receipt of the remainder of the U.S. Government grant, which approximates $128 million, (ii) additional secured aircraft debt (as of December 31, 2001, the Company had approximately $4.4 billion net book value of unencumbered aircraft), (iii) the availability of the Company’s $1 billion credit facility, (iv) sale-leaseback transactions of owned property, including aircraft and real estate, (v) tax-exempt borrowings for airport facilities, (vi) securitization of future operating receipts, (vii) unsecured borrowings, and (viii) borrowings backed by federal loan guarantees as provided under the Act. No assurance can be given that any of these financing sources will be available on terms acceptable to the Company. However, the Company believes it will meet its financing needs as discussed above. AMR (principally American) historically operates with a working capital deficit as do most other airline companies. The existence of such a deficit has not in the past impaired the Company’s ability to meet its obligations as they become due and is not expected to do so in the future. OTHER INFORMATION Environmental Matters Subsidiaries of AMR have been notified of potential liability with regard to several environmental cleanup sites and certain airport locations. At sites where remedial litigation has commenced, potential liability is joint and several. AMR’s alleged volumetric contributions at these sites are minimal compared to others. AMR does not expect these matters, individually or collectively, to have a material impact on its results of operations, financial position or liquidity. Additional information is included in Note 5 to the consolidated financial statements. Critical Accounting Policies and Estimates The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates. The Company has identified the following critical accounting policies and estimates utilized by management in the preparation of the Company’s financial statements: accounting for long-lived assets, passenger revenue, frequent flyer accounting, and pensions and other postretirement benefits. Accounting for Long-Lived Assets – The Company has approximately $21 billion of long-lived assets as of December 31, 2001, including approximately $19 billion related to flight equipment and related fixed assets. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by the Company, including estimated useful lives, salvage values and in 2001, impairment charges. In accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (SFAS 121), the Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In this circumstance, the impairment charge is determined 10

based upon the amount the net book value of the assets exceeds their fair market value. In making these determinations, the Company utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated salvage values. During 2001, the Company determined its Fokker 100, Saab 340 and ATR 42 aircraft and related rotables were impaired under SFAS 121 and recorded impairment charges of approximately $1.1 billion. In addition, during the fourth quarter of 2001, the Company completed an impairment analysis of its long-lived assets, including aircraft fleets, route acquisition costs, airport operating and gate lease rights, and goodwill. The impairment analysis did not result in any additional impairment charges. See Notes 1 and 2 to the consolidated financial statements for additional information with respect to each of the policies and assumptions utilized by the Company which affect the recorded values of long-lived assets. Passenger revenue – Passenger ticket sales are initially recorded as a component of air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors, including the complex pricing structure and interline agreements throughout the industry, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the outcome of future events based on the Company’s historical experience. Due to the uncertainties surrounding the impact of the September 11, 2001 events on the Company’s business (see Note 2 to the consolidated financial statements) and the acquisition of TWA in April 2001 (see Note 3 to the consolidated financial statements), historical trends may not be representative of future results. Frequent flyer accounting – The Company utilizes a number of estimates in accounting for its AAdvantage frequent flyer program. Additional information regarding the Company’s AAdvantage frequent flyer program is included in Note 1 to the consolidated financial statements. Changes to the percentage of the amount of revenue deferred, deferred recognition period, cost per mile estimates or the minimum award level accrued could have a significant impact on the Company’s revenues or incremental cost accrual in the year of the change as well as in future years. In addition, the Emerging Issues Task Force of the Financial Accounting Standards Board is currently reviewing the accounting for both multiple- deliverable revenue arrangements and volume-based sales incentive offers, but has not yet reached a consensus that would apply to programs such as the AAdvantage program. The issuance of new accounting standards could have a significant impact on the Company’s frequent flyer liability in the year of the change as well as in future years. Pensions and other postretirement benefits – The Company’s pension and other postretirement benefit costs and liabilities are calculated utilizing various actuarial assumptions and methodologies prescribed under Statements of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and No. 106, “Employers’ Accounting for Postretirement Bene- fits Other Than Pensions”. The Company utilizes certain assumptions including, but not limited to, the selection of the: (i) discount rate, (ii) expected return on plan assets, and (iii) expected health care cost trend rate. The discount rate assumption is based upon the review of high quality corporate bond rates and the change in these rates during the year. The expected return on plan assets and health care cost trend rate are based upon an evaluation of the Company’s historical trends and experience taking into account current and expected market conditions. In addition, the Company’s future pension and other postretirement benefit costs and liabilities will be impacted by the acquisition of TWA and the new labor agreements entered into during 2001. See Note 11 to the consolidated financial statements for additional information regarding the Company’s pension and other postretirement benefits. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statements of Finan- cial Accounting Standards No. 141, “Business Combinations” (SFAS 141) and No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 prohibits the use of the pooling-of-interests method for business combinations initiated after June 30, 2001 and includes criteria for the recognition of intangible assets separately from goodwill. SFAS 142 includes the requirement to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company will adopt SFAS 142 in the first quarter of 2002, and currently estimates the impact to the Company’s results of operations of discontinuing the amortization of goodwill and route authorities to be approximately $66 million on an annualized basis. The Company is currently evaluating what additional impact these new accounting standards may have on the Company’s financial position or results of operations. However, with the decline in the Company’s market capitalization, in part due to the terrorist attacks on September 11, 2001, the adoption of SFAS 142 may result in the impairment of the Company’s goodwill. 11

OUTLOOK Due in part to the lack of predictability of future traffic, business mix and yields, the Company continues to have difficulty in estimating the impact of the events of September 11, 2001. However, given the magnitude of these unprecedented events, the Company expects that the adverse impact to the Company – and to the airline industry as a whole – will continue to be signifi- cant in 2002. Because of the high degree of uncertainty, the Company is not currently able to provide an estimate for the full year 2002. However, the Company does expect to incur a sizable loss in the first quarter, and will likely incur a loss for 2002. Capacity for American – which reflects TWA in the first quarter of 2002 but not in the first quarter of 2001 – is expected to increase two to three percent in the first quarter of 2002 compared to last year’s first quarter levels. American Eagle’s capacity will be down slightly. Capacity for the remainder of 2002 is less clear and depends on a number of factors, including, but not limited to, how quickly demand returns and what levels of capacity the Company’s competitors deploy. Traffic continues to remain challenging to predict. However, for the first quarter of 2002, the Company expects traffic to be up about three percent from last year’s first quarter levels. In response to the September 11 terrorist attacks, the Company put in place numerous cost reduction initiatives, including, but not limited to: cutting capacity, grounding aircraft and deferring certain aircraft deliveries to future years, sharply reducing capital spending, closing facilities, trimming food service and reducing its workforce. In addition, the Company expects to see lower fuel prices in the first quarter of 2002 compared to 2001. Somewhat offsetting these cost savings, however, will be higher wages, salaries and benefit costs, higher security costs and insurance premiums, and greater interest expense. American’s unit costs for the first quarter of 2002 are expected to be three to five percent higher than last year’s first quarter. FORWARD-LOOKING INFORMATION The preceding Letter to Shareholders, Customers and Employees and Management’s Discussion and Analysis contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events. When used in this document and in documents incorporated herein by reference, the words “expects,” “plans,” “anticipates,” “believes,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company’s expectations concerning operations and financial conditions, including changes in capacity, revenues and costs, expectations as to future financing needs, overall economic conditions and plans and objectives for future operations, the ability to continue to successfully integrate with its operations the assets acquired from TWA and the former TWA workforce, and the impact of the events of September 11, 2001 on the Company and the sufficiency of the Company’s financial resources to absorb that impact. Other forward-looking statements include statements which do not relate solely to historical facts, such as, without limitation, statements which discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements are subject to a number of factors that could cause actual results to differ materially from our expectations. The following factors, in addition to other possible factors not listed, could cause the Company’s actual results to differ materially from those expressed in forward-looking statements: uncertainty of future collective bargaining agreements and events; economic and other conditions; fuel prices/supply; competition in the airline industry; changing business strategy; government regulation; uncertainty in international operations; adverse impact of the terrorist attacks; availability of future financing; and availability of the Act. Additional information concerning these and other factors is contained in the Company’s Securities and Exchange Commission filings, including but not limited to Form 10-K for 2001, copies of which are available from the Company without charge. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS The risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions management may take to mitigate the Company’s exposure to such changes. Actual results may differ. See Note 8 to the consolidated financial statements for accounting policies and additional information. 12

Aircraft Fuel The Company’s earnings are affected by changes in the price and availability of aircraft fuel. In order to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel storage facilities to support its flight operations. The Company also manages the price risk of fuel costs primarily by utilizing jet fuel, heating oil, and crude swap and option contracts. Market risk is estimated as a hypothetical 10 percent increase in the December 31, 2001 and 2000 cost per gallon of fuel. Based on projected 2002 fuel usage, such an increase would result in an increase to aircraft fuel expense of approx- imately $169 million in 2002, net of fuel hedge instruments outstanding at December 31, 2001, and assumes the Company’s fuel hedging program remains effective under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Comparatively, based on projected 2001 fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of approximately $194 million in 2001, net of fuel hedge instruments outstanding at December 31, 2000. The change in market risk is due primarily to the decrease in fuel prices. As of December 31, 2001, the Company had hedged approximately 40 percent of its estimated 2002 fuel requirements, approximately 21 percent of its estimated 2003 fuel requirements, and approximately five percent of its estimated 2004 fuel requirements, compared to approximately 40 percent of its estimated 2001 fuel requirements, 15 percent of its estimated 2002 fuel requirements, and approximately seven percent of its estimated 2003 fuel requirements hedged at December 31, 2000. Foreign Currency The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. The Company’s largest exposure comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies. The Company uses options to hedge a portion of its anticipated foreign currency-denominated ticket sales. The result of a uniform 10 percent strengthening in the value of the U.S. dollar from December 31, 2001 and 2000 levels relative to each of the currencies in which the Company has foreign currency exposure would result in a decrease in operating income of approximately $40 million and $33 million for the years ending December 31, 2002 and 2001, respectively, net of hedge instruments outstanding at December 31, 2001 and 2000, due to the Company’s foreign-denominated revenues exceeding its foreign-denominated expenses. This sensitivity analysis was prepared based upon projected 2002 and 2001 foreign currency-denominated revenues and expenses as of December 31, 2001 and 2000. Interest The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash and short-term investments, and its interest expense from variable-rate debt instruments. The Com- pany has variable-rate debt instruments representing approximately 35 percent and 29 percent of its total long-term debt at December 31, 2001 and 2000, respectively, and interest rate swaps on notional amounts of approximately $148 million and $158 million, respectively, at December 31, 2001 and 2000. If interest rates average 10 percent more in 2002 than they did at December 31, 2001, the Company’s interest expense would increase by approximately $10 million and interest income from cash and short-term investments would increase by approximately $16 million. In comparison, at December 31, 2000, the Company estimated that if interest rates averaged 10 percent more in 2001 than they did at December 31, 2000, the Company’s interest expense would have increased by approximately $11 million and interest income from cash and short-term investments would have increased by approximately $15 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate long-term debt, interest rate swap agreements, and cash and short-term investment balances at December 31, 2001 and 2000. Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $318 million and $148 million as of December 31, 2001 and 2000, respectively. The change in market risk is due primarily to the increase in the Company’s fixed-rate long-term debt during 2001. The fair values of the Company’s long-term debt were estimated using quoted market prices or discounted future cash flows based on the Company’s incremental borrowing rates for similar types of borrowing arrangements. In addition, the Company holds investments in certain other entities which are subject to market risk. However, the impact of such market risk on earnings is not significant due to the immateriality of the carrying value and the geographically diverse nature of these holdings. 13

CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (in millions, except per share amounts) 2001 2000 1999 Revenues Passenger – American Airlines $ 15,780 $ 16,394 $ 14,724 – AMR Eagle 1,378 1,452 1,294 Cargo 662 721 643 Other revenues 1,143 1,136 1,069 Total operating revenues 18,963 19,703 17,730 Expenses Wages, salaries and benefits 8,032 6,783 6,120 Aircraft fuel 2,888 2,495 1,696 Depreciation and amortization 1,404 1,202 1,092 Other rentals and landing f

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